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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For the transition period from  to
 Commission File Number: 000-50516  Eyetech Pharmaceuticals, Inc. (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    13-4104684(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 3 Times Square, 12th Floor
New York, New York 10036
(Address of Principal Executive Offices including Zip Code) (212) 824-3100
(Registrants Telephone Number, Including Area Code) No Change
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)   Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ The number of shares of registrants common stock outstanding on May 10, 2005 was
43,201,103.




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TABLE OF CONTENTS Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and March 31, 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and March 31, 2004 (unaudited)
    
    
    5Notes to Condensed Unaudited Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    14Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    43PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    
    44Item 2.Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    44Item 4.Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44Signatures
    
    
    45EX-10.1: CONSULTING AGREEMENTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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PART I  FINANCIAL INFORMATION EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED
BALANCE SHEETS
 March 31,
    
    
    December 31,2005
    
    
    2004(in thousands, except par value and shares)
    
    (Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    70,017
    
    
    $
    40,780Marketable securities
    
    
    195,662
    
    
    
    170,715Accounts receivable, net of allowances
    
    
    25,542
    
    
    
    Collaboration receivable
    
    
    6,424
    
    
    
    91,966Inventory
    
    
    6,546
    
    
    
    Prepaid expenses and other current assets
    
    
    7,921
    
    
    
    7,868Total current assets
    
    
    312,112
    
    
    
    311,329Property and equipment, net
    
    
    21,019
    
    
    
    17,817Restricted cash
    
    
    5,927
    
    
    
    5,927Other assets
    
    
    11,033
    
    
    
    4,386Total assets
    
    $
    350,091
    
    
    $
    339,459LIABILITIES
AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    24,871
    
    
    $
    25,103Collaboration profit share payable
    
    
    9,465
    
    
    
    Deferred revenue, current portion
    
    
    13,440
    
    
    
    13,693Capital lease obligations, current portion
    
    
    1,440
    
    
    
    1,460Deferred rent liability, current portion
    
    
    1,010
    
    
    
    1,038Total current liabilities
    
    
    50,226
    
    
    
    41,294Deferred revenue, net of current portion
    
    
    156,759
    
    
    
    159,706Capital lease obligations, net of current portion
    
    
    907
    
    
    
    1,254Deferred rent liability, net of current portion
    
    
    6,733
    
    
    
    6,067Stockholders equity:Preferred stock $.01 par value; 5,000,000 shares authorized,
none issued and outstanding at March 31, 2005 and December 31, 2004
    
    
    
    
    
    
    Common stock $.01 par value; 125,000,000 shares authorized;
43,513,799 issued and 43,074,770 outstanding at March 31, 2005;
42,329,499 issued and 41,904,499 outstanding at December 31, 2004
    
    
    435
    
    
    
    423Additional paid-in capital
    
    
    404,266
    
    
    
    382,177Deferred compensation
    
    
    (13,384
    )
    
    
    (11,817
    )Treasury stock, at cost
    
    
    (854
    )
    
    
    (255
    )Accumulated other comprehensive income
    
    
    (792
    )
    
    
    (573
    )Accumulated deficit
    
    
    (254,205
    )
    
    
    (238,817
    )Total stockholders equity
    
    
    135,466
    
    
    
    131,138Total liabilities and stockholders equity
    
    $
    350,091
    
    
    $
    339,459
 See accompanying notes. 3




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EYETECH PHARMACEUTICALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended March 31,(in thousands, except per share amounts)
    
    2005
    
    
    2004Revenue:Gross product revenue
    
    $
    25,408
    
    
    $
    Less: Distribution service fees, allowances and returns
    
    
    (1,741
    )
    
    
    Net product revenue
    
    
    23,667
    
    
    
    License fees
    
    
    3,087
    
    
    
    1,250Reimbursement of development costs
    
    
    7,248
    
    
    
    10,463Other revenue
    
    
    549
    
    
    
    Total revenue
    
    
    34,551
    
    
    
    11,713Operating expenses:Cost of goods sold
    
    
    4,737
    
    
    
    Research and development
    
    
    21,337
    
    
    
    21,931Sales and marketing
    
    
    10,420
    
    
    
    3,799Collaboration profit sharing
    
    
    9,465
    
    
    
    General and administrative
    
    
    5,613
    
    
    
    1,643Total operating expenses
    
    
    51,572
    
    
    
    27,373Loss from operations
    
    
    (17,021
    )
    
    
    (15,660
    )Interest income
    
    
    1,695
    
    
    
    694Interest expense
    
    
    (63
    )
    
    
    (46
    )Net loss
    
    
    (15,389
    )
    
    
    (15,012
    )Preferred stock accretion
    
    
    
    
    
    
    (816
    )Net loss attributable to common stockholders
    
    
    (15,389
    )
    
    
    (15,828
    )Basic and diluted net loss attributable
to common stockholders per share
    
    $
    (0.36
    )
    
    $
    (0.57
    )Weighted average shares outstanding  basic and diluted
    
    
    42,200
    
    
    
    27,530Pro forma basic and diluted net loss per share attributable to common
stockholders
    
    
    
    
    
    $
    (0.44
    )Weighted average shares outstanding  pro forma basic and diluted
    
    
    
    
    
    
    35,832
 See accompanying notes. 4




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EYETECH PHARMACEUTICALS INC 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended March 31,(in thousands)
    
    2005
    
    
    2004Operating activitiesNet loss
    
    $
    (15,389
    )
    
    $
    (15,012
    )Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,081
    
    
    
    552Noncash stock-based compensation
    
    
    3,722
    
    
    
    1,946Loss on disposal of assets
    
    
    14
    
    
    
    (Gain) loss on sale of marketable securities
    
    
    (1
    )
    
    
    7Changes in operating assets and liabilities:Collaboration receivable
    
    
    85,542
    
    
    
    (434
    )Accounts receivable
    
    
    (25,542
    )
    
    
    Prepaid expenses
    
    
    (42
    )
    
    
    (1,380
    )Inventory
    
    
    (6,546
    )
    
    
    Other assets
    
    
    (6,648
    )
    
    
    (38
    )Accounts payable and accrued expenses
    
    
    9,233
    
    
    
    (4,200
    )Deferred revenue
    
    
    (3,200
    )
    
    
    (1,250
    )Other liabilities
    
    
    639
    
    
    
    524Net cash provided by (used in) operating activities
    
    
    42,863
    
    
    
    (19,285
    )Investing activitiesPurchases of property and equipment
    
    
    (4,297
    )
    
    
    (2,016
    )Purchase of marketable securities
    
    
    (702,019
    )
    
    
    (1,822,600
    )Proceeds from sale of marketable securities
    
    
    676,855
    
    
    
    1,790,722Interest receivable
    
    
    (10
    )
    
    
    (337
    )Net cash used in investing activities
    
    
    (29,471
    )
    
    
    (34,231
    )Financing activitiesProceeds from issuance of common stock, net
    
    
    15,000
    
    
    
    154,660Proceeds from exercise of stock options
    
    
    1,812
    
    
    
    Proceeds from issuance of redeemable convertible
preferred stock and warrants, net
    
    
    
    
    
    
    2,640Purchase of treasury stock
    
    
    (599
    )
    
    
    Repayment of capital leases
    
    
    (368
    )
    
    
    (149
    )Net cash provided by financing activities
    
    
    15,845
    
    
    
    157,151Net increase in cash and cash equivalents
    
    
    29,237
    
    
    
    103,635Cash and cash equivalents at beginning of period
    
    
    40,780
    
    
    
    25,014Cash and cash equivalents at end of period
    
    $
    70,017
    
    
    $
    128,649Supplemental disclosures of cash flow informationCash paid during the period for:Interest
    
    $
    63
    
    
    $
    46Issuance of redeemable preferred stock
on conditional exercise of warrants
    
    $
    
    
    
    $
    501Conversion of redeemable and convertible
preferred stock to common stock
    
    $
    
    
    
    $
    189,614Expenses in connection with initial public
offering of common stock reclassified to
additional paid in capital
    
    $
    
    
    
    $
    1,701
 See accompanying notes. 5




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1. Organization and Description of Business Eyetech Pharmaceuticals, Inc., together with its wholly owned subsidiaries (collectively,
Eyetech or the Company), is a biopharmaceutical company that specializes in the development and
commercialization of novel therapeutics to treat diseases of the eye. The Companys initial focus
is on diseases affecting the back of the eye, particularly the retina. In December 2004, the
Company received approval from the United States Food and Drug Administration (FDA) to market its
first product, Macugen® (pegaptanib sodium injection), for the treatment of neovascular (wet)
age-related macular degeneration, known as neovascular AMD. The Company began selling Macugen in
the United States in January 2005. Macugen is being sold to a limited number of specialty
distributors who in turn sell Macugen to physicians, a limited number of specialty pharmacy
providers and federal government buying groups. The Company is also further developing Macugen for
the treatment of neovascular AMD and developing Macugen for the treatment of diabetic macular
edema, known as DME, which is a complication of diabetic retinopathy, retinal vein occlusion, known
as RVO, and other indications. The Company formed a wholly owned subsidiary in Ireland in 2002. There has been no activity in this
subsidiary since its inception in 2002. In November 2004, concurrent with the acquisition of a
potential second-source manufacturing facility for Macugen, the Company established a wholly owned
subsidiary to hold these assets. The Company operates in a single business segment. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Quarterly Report on Form 10-Q. Accordingly, they do not
include all the information and footnotes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of management, the accompanying financial
statements include all adjustments considered necessary for a fair presentation of the Companys
financial position, results of operations, and cash flows for the periods presented. The results of operations for the three-month period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending December 31, 2005.
These condensed consolidated financial statements should be read in conjunction with the audited
financial statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 filed with the Securities and Exchange Commission. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months
or less to be cash equivalents. At March 31, 2005 the Company had substantially all of its cash and
cash equivalents deposited with one financial institution. Marketable Securities Marketable securities are classified as available-for-sale and are carried at market value
with unrealized gains and losses reported as other comprehensive income or loss, which is a
separate component of stockholders equity. Restricted Cash Restricted cash of $5.9 million at March 31, 2005 and December 31, 2004 collateralizes $5.9
million of 6




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outstanding letters of credit associated with the leases of the Companys office and laboratory
facilities. The funds are invested in certificates of deposit. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk
consist of cash equivalents and marketable securities. The Company has established guidelines
relating to diversification and maturities that allow the Company to manage risk. Revenue Recognition Product Revenue The Company sells Macugen primarily to distributors, who, in turn, sell to physicians, a
limited number of specialty pharmacy providers and federal government buying groups. The Company
does not recognize revenue from product sales until there is persuasive evidence of an arrangement,
delivery has occurred, the price is fixed and determinable, the buyer is obligated to pay the
Company, the obligation to pay is not contingent on resale of the product, the buyer has economic
substance apart from the Company, the Company has no obligation to bring about sale of the product,
the amount of returns can be reasonably estimated and collectibility is reasonably assured. The Company reports product revenue on a gross basis for sales in the United States. The Company
has determined that it is qualified as a principal under the criteria set forth in Emerging Issues
Task Force (EITF), Issue 99-19, Reporting Gross Revenue as a Principal vs. Net as an Agent,
based on the Companys responsibilities under the Companys contracts with Pfizer Inc., which
include manufacture of product for sale in the United States, distribution, ownership of product
inventory and credit risk from customers. The Company records allowances for distribution fees, product returns and governmental rebates for
products sold in the United States at the time of sale, and reports revenue net of such allowances.
The Company must make significant judgments and estimates in determining these allowances. For
instance:  
    The Companys distributors have a limited right of return for unopened product during a
specified time period based on the products labeled expiration date. As a result, in
calculating the allowance for product returns, the Company estimates the likelihood that
product sold to distributors might be returned within a specific timeframe. The Company
determines its estimates using actual product data from distributors, industry data on
products with similar characteristics and the expiration dates of product sold.
    Certain government buying groups that purchase the Companys product from wholesalers
have the right to receive a discounted price from the Company. As a result, the Company
estimates the amount of product which will ultimately be sold to these buying groups. The
Company determines its estimates using actual product data from distributors and historical
industry trends. If actual results differ from the Companys estimates, the Company will be required to make
adjustments to these allowances in the future. Reimbursement of Development Costs and License Revenue Revenues associated with the Companys collaboration with Pfizer consist of non-refundable,
up-front license fees and reimbursement of development expenses. 7




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The Company uses revenue recognition criteria outlined in Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements and EITF Issue 00-21, Revenue Arrangements with
Multiple Deliverables (EITF 00-21). Accordingly, revenues from licensing agreements are
recognized based on the performance requirements of the agreement. Non-refundable up-front license
fees, where the Company has an ongoing involvement or performance obligation, are recorded as
deferred revenue in the balance sheet and amortized into license fees in the statement of
operations over the term of the performance obligation Revenues derived from reimbursements of costs associated with the development of Macugen are
recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as a Principal Versus Net as
an Agent (EITF 99-19), and EITF Issue 01-14, Income Statement Characterization of
Reimbursements Received For Out-of-Pocket Expenses Incurred (EITF 01-14). According to the
criteria established by these EITF Issues, in transactions where the Company acts as a principal,
with discretion to choose suppliers, bears credit risk and performs part of the services required
in the transaction, the Company has met the criteria to record revenue for the gross amount of the
reimbursements. Research and Development Costs Research and development costs are expensed as incurred. Inventory Inventory is stated at the lower of cost or market value. Inventory is comprised of three
components; raw materials, which are purchased directly by the Company, work in process, which is
Macugens active pharmaceutical ingredient (API) where title has transferred from our contract
manufacturer to the Company, and finished goods, which is packaged product ready for commercial
sale. Prior to FDA approval of Macugen in December 2004, the Company purchased raw materials and
manufactured API, the costs of which were expensed as research and development. Accordingly, cost
of goods sold for the three months ended March 31, 2005 does not include costs associated with the
manufacture of the API component of Macugen. There were no finished goods produced before the FDA
approval. The major classes of inventory were as follows: March 31,
    
    
    March 31,Inventory
    
    2005
    
    
    2004Raw materials
    
    $
    719
    
    
    $
    Work-in-progress
    
    
    1,753
    
    
    
    Finished goods
    
    
    4,074
    
    
    
    Total inventory
    
    $
    6,546
    
    
    $
    
 Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement No. 123 (SFAS No. 148). SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation from the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25). In addition, SFAS No. 148 amends the disclosure requirements of SFAS
No. 123, Accounting for 8




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Stock-Based Compensation (SFAS No. 123). The Company adopted the disclosure requirements of SFAS
No. 148 effective December 31, 2002. As allowed by SFAS No.123, the Company has elected to continue
to apply the intrinsic value-based method of accounting prescribed in APB No. 25 and, accordingly,
does not recognize compensation expense for stock option grants made at an exercise price equal to
or in excess of the fair market value of the stock at the date of grant. Had compensation cost for the Companys outstanding employee stock options been determined based on
the fair value at the grant dates for those options consistent with SFAS No. 123, the Companys net
loss and basic and diluted net loss per share, would have been changed to the following pro forma
amounts: Three Months EndedMarch 31,2005
    
    
    2004Net loss attributable to common stockholders, as reported
    
    $
    (15,389
    )
    
    $
    (15,828
    )Add: Non-cash employee compensation as reported
    
    
    4,146
    
    
    
    1,946Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
    
    
    (5,051
    )

    
    
    (1,778
    )SFAS No. 123 pro forma net loss
    
    $
    (16,294
    )
    
    $
    (15,660
    )Basic and diluted loss attributable to common
stockholders per share, as reported
    

    $
    (0.36
    )

    
    $
    0.57
    )Basic and diluted loss attributable to common
stockholders per share, SFAS No. 123 pro forma
    
    $
    (0.39
    )

    
    $
    (0.60
    )Unaudited pro forma basic and diluted net loss
attributable to common stockholders per share SFAS No.
123 pro forma
    
    
    N/A
    
    
    $
    (0.46
    )
 SFAS No. 123 pro forma information regarding net loss is required by SFAS No.123, and has been
determined as if the Company had accounted for its stock-based employee compensation under the fair
value method prescribed in SFAS No.123. The fair value of the options prior to completion of the
Companys initial public offering was estimated at the date of grant using the minimum value
pricing model. Upon completion of the initial public offering in February 2004, the Company began
using the Black-Scholes model to estimate fair value. The following assumptions were utilized for
the calculations during each period: Three Months EndedMarch 31,2005
    
    2004Risk-free interest rate
    
    
    4.39
    %
    
    
    3.86
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected life
    
    6.25 years
    
    
    5 yearsVolatility
    
    
    72
    %
    
    
    76
    %
 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts. Pro forma compensation related to stock option grants is expensed over their respective
vesting periods. The Company accounts for options issued to non-employees under SFAS No.123 and EITF Issue 96-18,
Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in 9




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Conjunction with Selling Goods or Services. As such, the value of such unvested options is
periodically re-measured and income or expense is recognized during their vesting terms. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation allowance is
provided when it is more likely than not that some portion or all of a deferred tax asset will not
be realized. Recently Issued Accounting Pronouncements On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)), which is a revision of FASB Statement No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25), and amends SFAS No. 95, Statement of Cash Flows (SFAS No.
95). Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No.
123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure will no longer be allowable. SFAS No. 123(R) must be adopted no later than the beginning of the first fiscal year beginning
after June 15, 2005, which in the case of the Company is January 1, 2006. Early adoption will be
permitted in periods in which financial statements have not yet been issued. The Company is
evaluating whether to adopt SFAS No. 123(R) prior to January 1, 2006. The Company expects to
adopt the modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees
using APB No. 25s intrinsic value method and, as such, generally recognizes no compensation cost
for employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will
have a significant impact on the Companys results of operations, although it will have no impact
on the Companys overall financial position. The impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share as disclosed above in Stock Based Compensation. 3. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128, Earnings per Share
(SFAS No.128). Under the provisions of SFAS No. 128, basic net loss per common share (Basic
EPS) is computed by dividing net loss by the weighted-average number of common shares outstanding.
Diluted net loss per common share (Diluted EPS) is computed by dividing net loss by the
weighted-average number of common shares and dilutive common share equivalents then outstanding.
Common equivalent shares consist of the incremental common shares issuable upon the conversion of
preferred stock, shares issuable upon the exercise of stock options and the conversion of preferred
stock upon the exercise of warrants. Diluted EPS is identical to Basic EPS since common equivalent
shares are excluded from the calculation, as their effect is anti-dilutive. 10




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The following table sets forth the computation of basic and diluted net loss per share for the
three-month periods ended March 31, 2005 and 2004: Three Months Ended March 31,2005
    
    
    2004Net loss
    
    $
    (15,389
    )
    
    $
    (15,012
    )Preferred stock accretion
    
    
    
    
    
    
    (816
    )Net loss attributable to common stockholders
    
    $
    (15,389
    )
    
    $
    (15,828
    )BasicWeighted average shares of common stock outstanding
    
    
    42,370
    
    
    
    27,530Less: weighted average shares subject to repurchase
    
    
    (170
    )
    
    
    Weighted average shares used in computing basic net loss
per share
    
    
    42,200
    
    
    
    27,530Basic net loss per share
    
    $
    (0.36
    )
    
    $
    (0.57
    )DilutedShares used in computing basic net loss per share
    
    
    42,200
    
    
    
    27,530Add: weighted average of dilutive securities
    
    
    
    
    
    
    Shares used in computing diluted net loss per share
    
    
    42,200
    
    
    
    27,530Diluted net loss per share
    
    $
    (0.36
    )
    
    $
    (0.57
    )Pro forma:Net loss to common stockholders
    
    
    
    
    
    $
    (15,012
    )Preferred stock accretion
    
    
    
    
    
    
    (816
    )Net loss
    
    
    
    
    
    $
    (15,828
    )Shares used to compute basic net loss per share
    
    
    
    
    
    
    27,530Pro forma adjustment to reflect the weighted-average
effect of assumed conversion of convertible preferred
stock
    
    
    
    
    
    
    8,302Shares used in computing pro forma basic net loss per share
    
    
    
    
    
    
    35,832Pro forma basic net loss per share
    
    
    
    
    
    $
    (0.44
    )
 Pro forma basic and diluted net loss per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic conversion of all
outstanding convertible preferred stock into shares of the Companys common stock effective upon
the closing of the Companys initial public offering, as if such conversion had occurred at the
date of the original issuance. Accordingly, pro forma basic and diluted net loss per common share
has been calculated assuming the preferred stock was converted as of the original date of issuance
of the preferred stock. The following table shows dilutive common share equivalents outstanding on a weighted average
basis, which are not included in the above historical calculations, as the effect of their
inclusion is anti-dilutive 11




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during each period: Three Months EndedMarch 31,2005
    
    
    2004Preferred stock
    
    
    
    
    
    
    8,253Options
    
    
    5,270
    
    
    
    5,717Warrants
    
    
    
    
    
    
    1,8465,270
    
    
    
    15,815
 4. Comprehensive Loss Comprehensive losses are primarily comprised of net losses and unrealized gains and losses on
available for sales securities. Comprehensive losses for the three months ended March 31, 2005 and
2004 are detailed below. Three Months EndedMarch 31,2005
    
    
    2004Net Loss
    
    $
    (15,389
    )
    
    $
    (15,012
    )Unrealized gain (loss) on
available for sale
securities
    
    
    (219

    )
    
    
    35Comprehensive loss
    
    $
    (15,608
    )
    
    $
    (14,976
    )
 5. Pfizer Collaboration In December 2002, Pfizer and the Company entered into several concurrent agreements to jointly
develop and commercialize Macugen. Under the terms of the agreement, which became effective
February 3, 2003 when government approval was obtained, Pfizer made initial payments of $100
million which included the purchase of 2,747,253 shares of the Companys Series D preferred stock
for $24.7 million , net of issuance costs and a $75 million initial license fee which is being
amortized over the expected term of the agreement (estimated at 15 years). In addition, Pfizer

agreed to purchase from the Company, up to an additional $25 million of the Companys capital stock
at the then current market price upon the completion of certain events. Such $25 million of capital
stock was purchased from the Company as follows: in February 2004, Pfizer purchased approximately
$10 million of common stock (476,190 shares of common stock) at $21.00 per share in connection with
the Companys initial public offering and, in February 2005, Pfizer purchased $15 million of common
stock (344,000 shares of common stock) at approximately $43.60 per share in connection with the
approval of Macugen in the United States. During 2004, the Company received an additional $15.5 million in license fees based on regulatory
filings in the United States and European Union and in 2005 received $90 million in connection with
the FDA approval of Macugen. These license fees are being amortized on a straight line basis over
the remaining expected term of the agreement (currently estimated at approximately 13 years). Based on the achievement of certain specified worldwide regulatory submission and approvals, the
Company would be eligible to receive up to an additional $90 million in license payments. The
Company
also has the potential to receive up to an additional $450 million in milestone payments, which are 12




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contingent upon successful commercialization of Macugen and which are based on attainment of
agreed-upon sales levels. Pfizer may terminate the collaboration relationship upon six to twelve
months prior notice, depending on when such notice is given. Following commercial launch in January 2005, Macugen is being co-promoted by the Company and Pfizer
in the United States where the Company has an ophthalmology sales force, maintains the inventory
and records as revenue all United States product sales. The Company and Pfizer will share in
profits and losses from the sale of Macugen products in the United States. Outside the United
States, Pfizer will market the product exclusively under a license, in connection with which the
Company will be entitled to receive royalty income. Under the terms of the agreement, both parties will expend funds related to the co-promotion and
development of Macugen. Pfizer will generally fund a majority of the ongoing development costs
incurred pursuant to an agreed upon development plan covering the development of Macugen for AMD,
DME, RVO and other agreed upon ophthalmic indications. In certain instances, the Company will
reimburse Pfizer for the Companys share of costs that Pfizer incurs. 13




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of
operations together with our consolidated financial statements and the related notes appearing
elsewhere in this report. Some of the information contained in this discussion and analysis or set
forth elsewhere in this report, including information with respect to our plans and strategy for
our business and related financing, includes forward-looking statements that involve risks and
uncertainties. You should review the Risk Factors that May Affect Results section of this report
for a discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in the following
discussion and analysis. Overview We are a biopharmaceutical company that specializes in the development and commercialization of
novel therapeutics to treat diseases of the eye. We commenced operations in April 2000. Since our
inception, we have generated significant losses. As of March 31, 2005, we had an accumulated
deficit of $254.2 million. In December 2002, we entered into agreements with Pfizer to jointly develop and commercialize
Macugen. Macugen is the first and only FDA-approved therapy for the treatment of all types of
neovascular AMD, without angiographic or demographic restrictions. We believe Macugen is a novel
treatment that targets the underlying cause of the disease. We began selling Macugen in the United
States in January 2005, after receiving approval from the FDA to market Macugen for the treatment
of neovascular AMD including all lesion subtypes and sizes in December 2004. We sell Macugen
primarily to distributors, who, in turn, sell to physicians, a limited number of specialty pharmacy
providers and federal government buying groups. We have a dedicated sales force promoting Macugen to our target audience, which comprises
approximately 2,000 specialists that treat retinal disease in the United States. Our sales team
consists of 60 people, covering sales, sales management, reimbursement issues and education of
doctors. In addition, Pfizer has dedicated over 160 sales representatives to detail Macugen,
targeting both general ophthalmologists and the retinal specialists. We estimate that a large percentage of the cost of Macugen will be covered through Medicare plans.
Medicare carriers of all 50 states have confirmed Macugen reimbursement, according to the FDA
label, without restrictions. Additionally, CMS has determined that effective as of January 1, 2005,
the allowable reimbursement for Macugen will be the manufacturers average sales price plus 6%. We began recording revenues from the sale of Macugen starting in mid-January 2005 subsequent to its
launch in the United States. In addition, a portion of our revenues as of March 31, 2005 has been
generated from amortization of the non-refundable, license payments that we have received from
Pfizer and reimbursement to us by Pfizer of a portion of the ongoing development costs for Macugen. Under the terms of our collaboration agreements with Pfizer, Pfizer has funded and is obligated to
continue to fund a majority of the ongoing development costs incurred pursuant to an agreed upon
development plan covering the development of Macugen for AMD, DME, RVO and other agreed upon
ophthalmic indications. Our agreements provide that we will co-promote Macugen with Pfizer in the
United States through Pfizers and our own sales forces, and that we will maintain the inventory
and record as revenue all United States product sales. We and Pfizer will share in profits and
losses from the sale of Macugen in the United States. Outside the United States, subject to
regulatory approval, Pfizer 14




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will market the product under an exclusive license, for which we would be entitled to receive
royalty payments based on net sales. Pfizer has made the following payments and investments to date under our collaboration:  
    In February 2003, upon effectiveness of the collaboration arrangements, Pfizer paid us
$100 million, consisting of a $75 million initial license fee and a $25 million equity
investment;
    In February 2004, Pfizer purchased an additional $10 million of our common stock at the
closing of our initial public offering;
    In September 2004, Pfizer paid us $10 million after the acceptance for review by the FDA
of our new drug application for the use of Macugen in the treatment of neovascular AMD;
    In October 2004, Pfizer paid us $5.5 million after the European Medicines Agencys
acceptance of the filing of Pfizers marketing authorization application for Macugen for
use in the treatment of neovascular AMD;
    In January 2005, Pfizer paid us a $90 million license fee after the approval in December
2004 by the FDA of Macugen for the treatment of neovascular AMD; and
    In February 2005, Pfizer purchased 344,000 shares of our common stock at a purchase
price of approximately $43.60 per share for total proceeds of $15 million after the
approval by the FDA of Macugen for the treatment of neovascular AMD. In the future, Pfizer may be obligated to make additional payments to us under the following
circumstances:  
    Up to $90 million in additional payments based on the achievement of additional
worldwide regulatory submissions and approvals; and
    Up to $450 million in payments based upon attainment of specified sales levels of
Macugen. Outside the United States, Pfizer is responsible for seeking regulatory approvals of Macugen.
Pfizer has filed new drug applications for Macugen with the European Medicines Evaluation Agency, which covers
25 countries, and an additional nine countries. In July 2004, the Pfizer-led bridging trial for the
use of Macugen in the treatment of neovascular AMD began in Japan. In May 2005, we announced the
approval of Macugen in Canada, to treat subfoveal choroidal neovascularization secondary to
neovascular AMD. We expect to continue to invest significant resources on the development of Macugen and other
product candidates as we continue to market and sell Macugen in the United States. We also plan to
continue to invest in research for additional applications of Macugen and to develop new drugs and
drug delivery technologies and in building the appropriate infrastructure to support our business.
We plan to continue to evaluate possible acquisitions or licenses of rights to potential new drugs,
drug targets and drug delivery technologies that would fit within our growth strategy. In May 2004, we entered into a lease for new research and development space in Lexington,
Massachusetts, that we anticipate will increase our annual facilities expenses by $1.6 million. In 15




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November 2004, we acquired most of the assets related to an oligonucleotide manufacturing facility
in Boulder, Colorado, which we plan to develop as a second-source for commercial scale production
of the active pharmaceutical ingredient in Macugen. We anticipate that we will invest significantly
in this development over the next 12 to 15 months. Accordingly, we will need to generate
significant revenues to achieve and then maintain profitability. Most of our expenditures to date have been for research and development activities and general and
administrative expenses. Research and development expenses represent costs incurred for product
acquisition, clinical trials and activities relating to regulatory filings and manufacturing
development efforts. We outsource our foreign clinical trials activities to third parties to
maximize efficiency and minimize our internal overhead. We also outsource our global manufacturing
development, but are planning to establish internal manufacturing capacity for the active
pharmaceutical ingredient in Macugen. We expense our research and development costs as they are
incurred. We anticipate that our revenues for the foreseeable future will result primarily from sales in the
United States of Macugen for the treatment of neovascular AMD, the continued amortization of
license fees and the reimbursement of a portion of our ongoing development costs for Macugen. Planned and Ongoing Clinical Programs In order to expand our pipeline of products to treat diseases of the eye with unmet medical need,
we are actively pursuing a strategy to develop new drugs internally and to license or otherwise
acquire rights to potential new drugs from third parties. We are also seeking to develop internally
and acquire rights to alternative mechanisms for delivering ophthalmic drugs to the back of the
eye. For example, since April 2004, we have had a research and collaboration agreement with
Archemix that allows us to develop their current pipeline of aptamers in the field of
ophthalmology. This agreement also provides us with the ability to have Archemix select new
aptamers against our targets included in the research program for further development by us in
ophthalmology. The following points summarize our material ongoing and planned trials and
activities related to Macugen:  
    We are continuing our Phase 2/3 clinical trial studying Macugen in
neovascular AMD to gain longer term safety data.
    In the second half of 2005, we plan to start a Phase 2/3 DME clinical
trial and our Phase 2 RVO clinical trial is currently enrolling patients. Both
DME and RVO represent large unmet medical needs, where there is no approved
pharmacological therapy.
    During the first half of 2006, we are planning to launch a Phase 4
clinical trial which will explore the safety and efficacy of the FDA approved
0.3 mg dose of Macugen versus two additional lower doses of Macugen in patients
with subfoveal, neovascular AMD. This trial will also provide subsequent
information on the potential degenerative effects on the neurosensory retina
and adverse effects on the corneal endothelium.
    In the second quarter of 2005, we and Pfizer started enrolling patients
in a Phase 4 combination trial with Macugen and Visudyne versus Macugen alone,
to determine if patients with the predominantly classic form of AMD benefit
from combination therapy. 16




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##### Table of Contents




    We are conducting pre-clinical research on improving Macugens drug
delivery, which if successful, may ultimately enable us to simplify the
treatment for AMD patients. In addition, if extended release Macugen is
ultimately successful, it may enable us to pursue the large prophylactic market
for dry AMD.
    We are conducting pre-clinical research to develop agents designed for
use in combination with Macugen to enhance its efficacy in the treatment of
neovascular AMD. Specifically, we are developing an aptamer which targets
platelet-derived growth factor (PDGF), a protein believed important in the
disease process underlying neovascular AMD. Critical Accounting Policies and Significant Judgments and Estimates Our managements discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, we
evaluate our estimates and judgments related to revenue recognition. We base our estimates on
historical experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Our estimates would likely
change if we used different assumptions or conditions and actual results may differ from our
estimates. Revenue Recognition We recognize revenue from the sale of our products, license fees earned, and reimbursements for
development costs based on contractual arrangements. We report revenue on a gross basis for product sales of Macugen in the United States. Revenue from
product sales consists of sales of Macugen. We sell our product primarily to distributors, who, in
turn, sell to physicians, a limited number of specialty pharmacy providers and federal government
buying groups. We recognize revenue from product sales upon shipment to a distributor based on
verified purchase orders. Additionally, the following must be present for a sale to be recognized:  O
    The price of the sales order is fixed and determinable, and the buyer is obligated to
pay us;O
    The obligation to pay is not contingent on resale of the product as the buyer has
economic substance apart from us, thus we have no obligation to bring about sale of the product; andO
    The amount of returns can be reasonably estimated and collectibility is reasonably
assured. We record allowances for product returns at the time of sale, and report revenue net of such
allowances. We must make significant judgments and estimates in determining these allowances. For
instance, our distributors have the right to return any damaged or defective product, patent or
latent, as well as any unopened product during the nine-month period beginning three months prior
to the labeled expiration date and ending six months after the labeled expiration date. As a
result, in calculating the allowance for product returns, we must estimate the likelihood that
product sold to distributors might contain a defect and/or remain in their inventory to within
three months of expiration and determine if it will be returned. We base our estimates on
information from distributors, current patterns of returns, industry data and the expiration dates
of product currently being shipped. 17




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If actual results differ from our estimates, we will be required to make adjustments to these
allowances in the future. In connection with our collaboration with Pfizer, we are entitled to receive non-refundable license
payments from Pfizer based on the achievement of certain events. We record deferred license revenue
when all the contractual obligations related to a non-refundable payment have been satisfied. We
are amortizing deferred license revenue ratably over our performance period. Our performance period
with respect to our collaboration agreement is the effective life of the agreement, which was 15
years commencing in December 2002. Management estimates the performance period based upon critical
factors contained within the agreement along with other relevant facts and circumstances. We
periodically review our estimates, which could result in a change in the deferral period, and could
impact the timing and the amount of revenue recognized. We receive reimbursement from Pfizer of Pfizers share of development costs for Macugen. In
accordance with Emerging Issues Task Force (EITF) Issue 01-14, Income Statement Characterization
of Reimbursements Received for Out-of-Pocket Expenses Incurred, (EITF Issue 01-14) we report
the reimbursement as revenues because among other factors, we have the primary obligation to
conduct all clinical studies associated with Macugen and bear risk for selection of and payment to
vendors. We record as expense the costs incurred by Pfizer for which we are contractually liable
to Pfizer. In future periods we may be liable for costs incurred that do not meet the criteria to
be classified as revenue. We would record these costs as expenses. We receive reimbursement from Pfizer for a portion of the costs associated with the purchase of
certain equipment related to the development of Macugen. For these items, when we receive payment
from Pfizer, we record the reimbursement as deferred equipment revenue and amortize it over the
equipments expected useful life. During the quarters ended March 31, 2005 and 2004, we recognized $3.1 million and $1.3 million,
respectively, of license fee revenue. At March 31, 2005, we classified as current deferred revenue
$13.4 million related to payments for licenses and equipment. The balance of $156.8 million is
classified as long-term deferred revenue on our balance sheet with a remaining amortization period
of 12 years and 10 months. Effective with Macugen approval, this deferred license fee revenue will
be offset by the amortization of license fees paid in connection with the acquisition of Macugen
and certain manufacturing technologies, which we capitalized upon regulatory approval. Inventory Inventory is stated at the lower of cost or market value. Inventory is comprised of three
components; raw materials, which are purchased directly by us, work in process, which is Macugens
active pharmaceutical ingredient (API) where title has transferred from our contract manufacturer
to us and finished goods, which is packaged product ready for commercial sale. Prior to FDA
approval of Macugen in December 2004, the cost of raw materials purchased by us and API
manufactured were expensed as research and development. Accordingly, cost of goods sold for the
three months ended March 31, 2005 does not include costs associated with the manufacture of the API
component of Macugen. There were no finished goods produced before the FDA approval. Stock-based Compensation Stock-based compensation charges represent the difference between the exercise price of options and
restricted stock awards granted to employees and directors and the fair value of our common stock
on the date of grant for financial statement purposes in accordance with Accounting Principles
Board Opinion 18




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No. 25 and its related interpretations. We recognize this compensation charge over the vesting
periods of the shares issuable upon exercise of options or the lapsing of restrictions on
restricted stock granted. We recorded deferred stock-based compensation related to stock options and restricted stock awards
granted to employees and directors through March 31, 2005 of $13.4 million, net of related
amortization expense of $1.9 million for the quarter ended March 31, 2005. We expect to amortize $6
million of deferred stock-based compensation, with respect to stock options and restricted stock
awards granted, through December 31, 2005. For periods after December 31, 2005, we will no longer
be required to record deferred compensation and the related amortization expense due to the
adoption of SFAS No. 123(R) which will require us to reverse any previously recorded deferred
compensation, and recognize expenses currently. Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payments (SFAS No. 123(R)).
SFAS No. 123(R) will require companies to measure all employee
share-based compensation awards
using a fair value method and record such expense in its consolidated financial statements. In
addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to
the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No.
123(R) is effective no later than the beginning of the first fiscal year beginning after June 15,
2005 and we will be required to implement the standard beginning January 1, 2006. We anticipate
that upon adoption we will elect to use the modified prospective method of calculating expense
using the Black-Scholes pricing model. The impact of adoption of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income
and earnings per share as disclosed in our footnotes to our financial statements. Results of Operations Quarter Ended March 31, 2005 and 2004 Revenue.For the first quarter of 2005, total revenues were $34.6 million. Product Sales.Gross product revenue from Macugen sales was $25.4 million, while
net product revenue was $23.7 million. Gross product revenue represents shipments to our
wholesale distribution network. Net product revenue represents gross product revenue less
distribution service fees, estimates for allowances and returns. At March 31, 2005, we
estimate that our wholesale distribution network had less than two weeks of Macugen supply
on hand based on current product demand. License Fees, Reimbursements of Development Costs and Other Revenue .Collaboration
revenue of $10.3 million for the quarter ended March 31, 2005 decreased from $11.7 million
for the quarter ended March 31, 2004. Revenue comprised of license fees increased by $1.9
million due to amortization of higher deferred license revenue balances. Revenue from
reimbursement of research and development costs decreased by $3.3 million. This decrease was
primarily due to decreased reimbursement of expenditures related to preparation of our
manufacturing capabilities for the commercial launch of Macugen. We also generated other
revenue of $0.5 million from the production and delivery of certain material made at our
recently purchased Boulder facility. These revenues relate to acquired production contracts
that existed between the party that sold us 19




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the assets and a third party. We expect that these revenues will continue through the third
quarter. Cost of Goods Sold.Product cost of goods sold was $4.7 million for the quarter ended
March 31, 2005. Cost of goods sold for the first quarter of 2005 includes costs associated with the
manufacture of Macugen sold, royalty expense and certain other costs. Product manufacturing costs
represent almost 5% of net product revenue in 2005 and primarily resulted from converting the API
used in Macugen into finished commercial product. Prior to the approval of Macugen by the FDA in
December 2004, we expensed all costs associated with the manufacture of the API and certain raw
materials used in the production of Macugen. Therefore, cost of goods sold for the first quarter
ended March 31, 2005 does not include costs associated with the manufacture of the API component of
Macugen. We had manufactured approximately 6 months of API supply prior to FDA approval in
December of 2004 and estimate that the margin from product sales will decrease approximately 1% to
2% when full API cost is included. Royalty expenses under our agreements with Gilead Sciences,
Isis Pharmaceuticals and Nektar Therapeutics, are included in cost of goods sold and are based on
net sales. There had been no cost of goods sold recorded for the quarter ended March 31, 2004 as we
did not begin to sell Macugen until the quarter ended March 31, 2005. Research and Development Expenses.Research and development expenses were $21.3 million for the
quarter ended March 31, 2005 compared to $21.9 million for the quarter ended March 31, 2004. The
change in research and development expenses was primarily attributable to a $3.7 million reduction
in manufacturing related costs, which prior to the approval of Macugen had been included in
research and development expenses, offset by an increase of $3.0 million in expenditures related to
our clinical trials for the use of Macugen in the treatment of
neovascular AMD, DME and RVO. We
anticipate that research and development expenses will increase as we begin to devote additional
resources to research and development related projects including targets in ophthalmology and other
disease areas as well as drug delivery technologies. Sales and Marketing Expenses.Sales and marketing expenses increased to $10.4 million for the
quarter ended March 31, 2005 from $3.8 million for the quarter ended March 31, 2004. The increase
in sales and marketing expenses of $6.6 million was primarily related to an increase of $3.8
million in expenses relating to our sales field force which began detailing Macugen to retinal
specialists during the quarter and an increase of $2.7 million of promotional and marketing
expenses, which was primarily comprised of amounts payable to Pfizer for our share of total
marketing expenses related to Macugen. We and Pfizer are jointly responsible for the co-promotion
of Macugen within the United States. We incur and record only the expenses relating to our sales
force, and Pfizer is solely responsible for expenses and costs related to its sales force. Our
sales team consists of 60 people, covering sales, sales management, reimbursement issues and
education of doctors. Pfizer has an ophthalmic sales force of approximately 160 sales
representatives detailing Macugen by targeting both general ophthalmologists and the retinal
specialists. Marketing budgets and decisions related to Macugen are jointly decided by Pfizer and
us with Pfizer being responsible for paying almost all non-personnel marketing expenses. As a
result, we reimburse Pfizer for its share of marketing expenses related to United States Macugen
sales. General and Administrative Expenses.General and administrative expenses increased to $5.6 million
for the quarter ended March 31, 2005 from $1.6 million for the quarter ended March 31, 2004. The
increase of $4 million resulted from a one-time charge of approximately $2.6 million related to an
officers resignation and employment agreement termination in March 2005. The one-time charge is
primarily non-cash compensation expense in connection with the acceleration of certain employee
stock options granted to the officer. In addition, general &
administrative expenses increased by $0.3
million related to increases in staff salaries, $0.5 million of increased professional fees expense
related to compliance initiatives, Sarbanes-Oxley Act Section 404 implementation and $0.3 million
increase in non-cash compensation expense for stock awards to employees. 20




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Collaboration Profit Sharing.Collaboration profit sharing of $9.5 million represents Pfizers
share of net product sales of Macugen less cost of goods sold within the United States. Interest Income.Interest income increased to $1.7 million in the quarter ended March 31, 2005 from
$0.7 million in the quarter ended March 31, 2004 as a result of higher levels of cash and
marketable securities available for investment during 2005 plus a higher effective return on
invested cash. Net Loss.Net loss attributable to common stockholders decreased to $15.4 million for the quarter
ended March 31, 2005 from $15.8 million in the same period of 2004. The decrease of $0.4 million in
net loss was primarily due to increases of $6.6 million for costs incurred for sales and marketing
expenses related to the launch and promotion of Macugen, $4.0 million of increased general &
administrative expenses which includes $2.8 million of non-cash stock compensation expense. These
increased costs were offset by $22.8 million in increased revenues from the launch of Macugen.
Basic and diluted net loss per common share for the quarters ended March 31 was $0.36 in 2005,
compared to $0.57 for the same period in 2004. Pro forma basic and diluted loss per common share
for the quarter ended March 31 was $0.36 in 2005, compared to $0.44 for the same period in 2004. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have financed our operations through public sales and private placements of
our capital stock, the initial and subsequent license fee payments that we received from Pfizer as
part of our Macugen collaboration, reimbursement of development costs from Pfizer and the receipt
of interest income, and as of January 20, 2005, through product sales as well. Through March 31,
2005, we received net proceeds of $352.8 million from the issuance of shares of common stock. We
have also received net proceeds from capital equipment financing of $2.4 million. In connection with our collaboration with Pfizer, we received in 2003 a $25.0 million investment in
our preferred stock and a $75.0 million initial license fee and subsequent license fee payments of
$105.5 million. Pfizer purchased an additional $10 million of our common stock at the closing of
our initial public offering in February 2004 and $15 million of our common stock in February 2005
in connection with the regulatory approval of Macugen. Pfizer has also agreed generally to fund a
majority of the ongoing development costs incurred pursuant to an agreed development plan covering
the development of Macugen for AMD, DME, RVO and other agreed upon ophthalmic indications. These
obligations of Pfizer are contingent upon the achievement of milestones and are currently our only
committed external source of funds. As of March 31, 2005, we had $265.7 million in cash, cash equivalents and marketable securities.
Also as of that date, we had pledged $5.9 million of restricted cash as collateral for letters of
credit for certain of our leased facilities. We believe that our available cash, cash equivalents
and marketable securities, together with expected license, milestone payments and reimbursements
from Pfizer under our collaboration, revenues from product sales and interest income will be
sufficient to fund anticipated levels of operations through at least the end of 2006. We have made
certain material capital commitments regarding software implementation and contractual obligations
relating to our Boulder facility expansion during the quarter ended March 31, 2005. Income Taxes As of December 31, 2004, we had net operating loss carryforwards for federal income taxes of $174.8 21




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million. Our utilization of the net operating loss and tax credit carryforwards may be subject to
annual limitations pursuant to Section 382 of the Internal Revenue Code, and similar state
provisions, as a result of changes in our ownership structure. The annual limitations may result in
the expiration of net operating losses and credits prior to utilization. If not utilized, federal
net operating loss carryforwards will begin to expire in 2020. To date, we have not recognized the
potential tax benefit of our net operating losses. At March 31, 2005, we had deferred tax assets representing the benefit of net operating loss
carryforwards, deferred license fees received, deferred rent, and certain start-up costs
capitalized for tax purposes. We did not record a benefit for the deferred tax assets because
realization of the benefit was uncertain, and, accordingly, a full valuation allowance is provided
to offset the deferred tax asset. Though we do not expect to be profitable by December 31, 2005, we may incur federal and state
alternative minimum tax depending on certain tax laws effecting our operations that are
irrespective of the net operating loss carryforwards. To date we believe there are no taxable
events that meet these criteria. Accordingly, we have not recorded any provision for income taxes
during the quarter ended March 31, 2005. Cash Flows For the quarter ended March 31, 2005, we received net cash of $42.9 million from operating
activities. This consisted primarily of a net loss for the period of $15.4 million, offset by a net
decrease in deferred revenue and collaboration receivable of $82.3 million, and an increase in
accounts receivable of $25.5 million. We believe that our current sales growth will result in
continued increases of our accounts receivable for the next 12 months. We used $29.5 million for
investing activities for the quarter ended March 31, 2005, which consisted primarily of net
purchases of marketable securities. We received net cash of $15.8 million from financing activities
during the quarter ended March 31, 2005, principally relating to the issuance of common stock,
resulting in net proceeds, after transaction costs, of $16.8 million, offset by the purchase of
treasury stock for $0.6 million and repayment of capital leases of $0.4 million. Funding Requirements We expect to devote substantial resources to continue our research and development efforts and to
expand our sales, marketing and manufacturing programs associated with the continued
commercialization of Macugen for the treatment of neovascular AMD, other future products and other
uses for Macugen. Our funding requirements will depend on numerous factors, including:  
    the success of our collaboration with Pfizer to further develop and commercialize Macugen;
    the scope and results of our clinical trials;
    the cost of manufacturing activities including the expansion of our Boulder facility;
    the cost of commercialization activities, including product marketing, sales and distribution;
    advancement of other product candidates into development;
    potential acquisition or in-licensing of other products or technologies;
    the timing of, extent of, and the costs involved in, obtaining additional regulatory approvals; 22




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
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other patent-related costs, including litigation costs and the results of such
litigation; and
    our ability to establish and maintain additional collaborative arrangements. We believe that the key factors that will affect our internal and external sources of cash
are:  
    our ability to commercially launch Macugen in the United States and to obtain marketing
approval outside the United States;
    the receptivity of the capital markets to financings by biotechnology companies;
    the success of our other preclinical and clinical development programs;
    our accounts receivable growth and collections cycle; and
    our ability to enter into additional strategic collaborations with corporate and
academic collaborators and the success of such collaborations. If our existing resources are insufficient to satisfy our liquidity requirements or if we acquire
or license rights to additional product candidates, we may need to raise additional external funds
through the sale of additional equity or debt securities. The sale of additional equity securities
may result in additional dilution to our stockholders. Additional financing may not be available in
amounts or on terms acceptable to us or at all. If we are unable to obtain additional financing, we
may be required to reduce the scope of, delay or eliminate some or all of our planned business
expansion, research, development and commercialization activities, which could harm our financial
condition and operating results. Contractual Obligations Our major outstanding contractual obligations relate to our capital leases from equipment
financings, facilities leases, commitments to purchase capital assets and obligations under a
number of our collaboration and alliance agreements to pay milestone payments and royalties to the
other parties to these agreements. We have summarized in the table below our fixed contractual cash obligations as of March 31, 2005. Payments Due by PeriodLess Than
    
    
    One to
    
    
    Three to
    
    
    More ThanContractual Obligations
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five YearsCapital lease obligations, including
interest
    
    $
    2,528
    
    
    $
    1,218
    
    
    $
    1,310
    
    
    $
    
    
    
    $
    Operating leases
    
    
    78,177
    
    
    
    4,445
    
    
    
    10,911
    
    
    
    10,138
    
    
    
    52,683Purchase obligations
    
    
    1,000
    
    
    
    1,000Total contractual
cash obligations
    
    $
    81,705
    
    
    
    6,663
    
    
    
    12,221
    
    
    
    10,138
    
    
    
    52,683
 Under our agreements with Gilead Sciences, Inc., Nektar Therapeutics, and Isis
Pharmaceuticals, Inc., we 23




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are obligated to make payments aggregating up to $36.3 million, of which $10.5 million has been
expensed through March 31, 2005 and $13.0 million has been capitalized through March 31, 2005, upon
achieving specified milestones relating to the development and regulatory approval of Macugen and
to pay royalties based on net sales of Macugen. The $13.0 million capitalized at March 31, 2005
includes $3.0 million of prepaid royalties and $10.0 million which has been capitalized and will be
amortized ratably over the remaining life of the agreements along with all payments made in
connection with the achievement of future milestones. Future events that trigger the milestone
payments include filing of a new drug application (NDA) with the FDA, making similar filings with
foreign regulatory authorities, receiving marketing approval for Macugen by the FDA or similar
foreign regulatory authorities and the first commercial sale of Macugen in various countries. These
contingent milestone and royalty payment obligations are not included in the above table. The above
table also excludes approximately $2.0 million in minimum fixed site fees payable to one of our
contract manufacturers on a quarterly basis. In January 2004, we entered into a sub-sublease arrangement for new corporate headquarters,
clinical, safety and regulatory space in New York City. Our rent expense under that sub-sublease
was $0.8 million in the first quarter of 2005. However, due to 2005 rent abatements, we had no cash
expenditures for this property through March 31, 2005. As security for the sub-sublease, we have
named the sub-landlord as beneficiary under a secured bank letter of credit in the amount of $3.0
million, which is included in restricted cash on the balance sheet. We have not subleased our former corporate offices at 500 Seventh Avenue, New York, New York, and
as a result, under generally accepted accounting principles we have assessed the recoverability of
the carrying value of our lease. We have determined that the amounts due under the lease will not
be recoverable, and have recorded a loss in connection with this lease. Through December 31, 2004,
we have recorded a loss of $1.9 million on this facility. We will continue to re-evaluate the
recoverability of this lease and may be required to record additional expense of up to $0.5 million
in future periods. We have not been able to sublease our previous laboratory space in Woburn, Massachusetts and as a
result, we have been required under generally accepted accounting principles to assess the
recoverability of the carrying value of our lease. We have determined that the amounts due under
the lease will not be recoverable, and have recorded a loss in connection with this lease. Through
December 31, 2004 we have recorded a loss of $0.8 million on this facility. We will continue to
re-evaluate the recoverability of this lease and may be required to record additional expense of up
to $0.3 million in future periods. 24




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RISK FACTORS THAT MAY AFFECT RESULTS Risks Relating to Our Business We depend heavily on the success of our one product, Macugen, which the FDA recently approved for
use in the treatment of neovascular AMD and we began selling in the United States in January 2005. In December 2004, the FDA granted marketing approval for the use of our first product, Macugen, in
the treatment of neovascular AMD. We began selling Macugen in the United States in January 2005.
Our ability to continue generating product revenue in the foreseeable future will depend solely on
the commercialization of Macugen. The commercial success of Macugen will depend on several factors,
including the following:  
    acceptance of the product in the medical community, by patients receiving therapy
and by third party payors;
    supplying sufficient quantities of Macugen to meet market demand;
    successfully building and sustaining manufacturing capacity to meet future demand;
    the competitive landscape for approved and developing therapies that will compete
with Macugen;
    Macugens efficacy and safety profile as demonstrated in a broad patient population
continuing to be consistent with that shown in clinical trials;
    receipt of marketing approvals from non-U.S. regulatory authorities;
    our ability to expand the indications for which we can market Macugen;
    continued positive data from our clinical trials; and
    implementation of our post-approval commitments to the FDA in a timely fashion. We depend heavily on our collaboration with Pfizer, which involves a complex sharing of control
over decisions, responsibilities and costs and benefits. Any loss of Pfizer as a collaborator, or
adverse development in the collaboration, would materially harm our business. In December 2002, we entered into our collaboration with Pfizer to develop and commercialize
Macugen for the prevention and treatment of diseases of the eye. The collaboration involves a
complex sharing of control over decisions, responsibilities and costs and benefits. For example,
with respect to the sharing of costs and benefits, Pfizer will co-promote Macugen with us in the
United States and will share with us in profits and losses. Outside the United States, Pfizer will
commercialize Macugen pursuant to an exclusive license and pay us a royalty on net sales. In
addition, Pfizer generally is required to fund a majority of ongoing development costs incurred
pursuant to an agreed upon development plan. Our collaboration is governed by a joint operating
committee, consisting of an equal number of representatives of Pfizer and us who control decisions
and responsibilities. There are also subcommittees with equal representation from both parties that
have responsibility over development, regulatory, manufacturing and commercialization matters. Ultimate decision-making authority is vested in us as to some matters and in Pfizer as to other
matters. A third category of decisions requires the approval of both Pfizer and us. Outside the
United States, ultimate decision-making authority as to most matters is vested in Pfizer. Pfizer
may terminate the collaboration relationship without cause upon six to twelve months prior notice,
depending on when such notice is given. Any loss of Pfizer as a collaborator in the development or
commercialization of Macugen, dispute over the terms of, or decisions regarding, the collaboration
or other adverse development in our relationship with Pfizer would materially harm our business and
might accelerate our need for additional capital. 25




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Our product revenues are substantially dependent on a limited number of wholesale distributors to
which we sell Macugen. Product revenues may fluctuate from quarter to quarter based on the buying
patterns of these distributors. We sell Macugen primarily to three national pharmaceutical wholesale distributors located
throughout the United States: McKesson Specialty, Priority Healthcare and Besse Medical. Our
reliance on this small number of wholesalers could cause our revenues to fluctuate from quarter to
quarter based on the buying patterns of these wholesalers. In addition, if any of these wholesalers
fail to pay us on a timely basis or at all, our financial position and results of operations could
be materially adversely affected. We face substantial competition with respect to sales of Macugen or other drugs that we may develop
or commercialize, which may result in others discovering, developing or commercializing competing
products before or more successfully than we do. The commercialization and development of new drugs is highly competitive. We will face competition
with respect to Macugen and any products we may commercialize or develop in the future from major
pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide.
Our competitors may develop products or other novel technologies that are more effective, safer or
less costly than any that we are developing. Our competitors may also obtain FDA or other
regulatory approval for their products more rapidly than we may obtain approval for ours. Macugen competes against two therapies for the treatment of neovascular AMD: photodynamic therapy
with verteporfin, which was developed by QLT, Inc. and is marketed by Novartis AG, and thermal
laser treatment. In the United States, photodynamic therapy is FDA-approved only for the
predominantly classic subtype of neovascular AMD, which we estimate to represent up to 25% of the
market for subfoveal neovascular AMD. In the European Union, the only approved therapy is
photodynamic therapy, which is approved only for the predominantly classic and occult subtypes. In
the United States, however, the Centers for Medicare & Medicaid Services implemented a decision in
April 2004 to provide coverage for photodynamic therapy to patients with neovascular AMD who have
occult and minimally classic lesions that are four disc areas or less in size and show evidence of
recent disease progression even though the FDA has not approved photodynamic therapy for such
treatment. The current therapies for the treatment of DME are thermal laser treatment and steroid
treatment administered via intravitreal injection, by physicians, usually in combination with
photodynamic therapy, on an off-label basis. Unless additional therapies are approved, these
existing therapies would represent the principal competition for Macugen in neovascular AMD and, if
Macugen is approved for DME, for DME. Additional treatments for AMD and DME are in various stages of preclinical or clinical testing. If
approved, these treatments would also compete with Macugen. Potential treatments in late stage
clinical trials include drugs sponsored by a collaboration of Genentech, Inc. and Novartis, Alcon,
Inc., Allergan, Inc. through its acquisition of Oculex Pharmaceuticals, Inc., Eli Lilly and Co.,
Bausch & Lomb Incorporated, Regeneron Pharmaceuticals, Inc., Miravant Medical Technologies, and
Genaera Corporation. Some of the sponsors of these potential products have announced favorable
results from Phase 1 or Phase 2 clinical trials. The Genentech/Novartis collaboration is developing
an anti-VEGF humanized antibody fragment for intravitreal injection. This product candidate may be
viewed as particularly competitive with Macugen because of the similarity of its mechanism of
action. Preliminary results of Phase 3 clinical trials for this product candidate will likely be
released this year. In addition, in November 2004, Alcon filed an NDA for approval of anecortave
acetate, an angiostatic compound, for the treatment of predominately classic neovascular AMD
patients and received fast track, Pilot 1 program designation. This compound features a less
invasive injectable delivery and requires less frequent administration (every six months).
Further, Alcon is enrolling patients in two additional Phase 3 clinical trials, one in South
America and one in Europe, comparing the safety and efficacy of Alcons compound 26




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against placebo in patients with all subtypes of neovascular AMD. Bausch & Lomb recently received
FDA approval for a device surgically implanted inside the eye which slowly releases a dose of
corticosteroid for use in the treatment of chronic non-infectious uveitis. This devise is also
being developed in the treatment of DME. Other laser, surgical or pharmaceutical treatments for
AMD and DME may also compete against Macugen. These competitive therapies may affect product
pricing even if Macugen is otherwise viewed as a preferable therapy. Future competitive products
may have superior efficacy, improved safety and convenience or reduced frequency of administration
compared to Macugen. Because Macugen is currently our only approved product, any product that
arises with superior efficacy, improved safety and convenience or reduced frequency of
administration compared to Macugen may have a material adverse affect on our business. Even the
expectation that a competitive product may gain marketing approval to compete with Macugen may have
a negative effect on the trading price of our common stock. Many of our competitors have substantially greater financial, technical and human resources than we
have. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may
result in even more resources being concentrated by our competitors. Competition may increase
further as a result of advances made in the commercial applicability of technologies and greater
availability of capital for investment in these fields. There may be limited market acceptance of Macugen and other products we may develop in the future
that are based on new technologies. The commercial success of the products for which we may obtain marketing approval from the FDA or
other regulatory authorities will depend upon the acceptance of these products by the medical
community and third party payors as clinically useful, cost-effective and safe. Even if a potential
product displays a favorable efficacy and safety profile in clinical trials, market acceptance of
the product will not be known until some time after it is commercially launched. We expect that
many of the products that we develop will be based upon new technologies. Our efforts to educate
the medical community about these potentially unique approaches may require greater resources than
would be typically required for products based on conventional technologies. The safety, efficacy,
convenience and cost-effectiveness of our products as compared to competitive products will also
affect market acceptance. We have only recently established our sales and marketing capabilities and have never marketed or
sold products as a company. We will need to work with our partner, Pfizer, and integrate our
marketing and sales infrastructures to successfully commercialize any products that we may develop,
acquire or license. We have limited experience as a company in marketing and selling products. We have a marketing
team and specialty sales force with significant industry experience that began to market and sell
Macugen in the United States in January 2005 in collaboration with Pfizer. To achieve commercial
success for Macugen, our sales and marketing organization must work with our partner, Pfizer, to
effectively integrate our sales and marketing infrastructures and implement our sales and marketing
efforts. If our sales and marketing efforts are not successful our business will materially suffer. We may not be successful in our efforts to expand our portfolio of products. A key element of our strategy is to commercialize a portfolio of new drugs in addition to Macugen.
We are seeking to do so through our internal research programs and through licensing or otherwise
acquiring the rights to potential new drugs and drug targets for the treatment of ophthalmic and
other diseases. 27




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A significant portion of the research that we are conducting involves new and unproven
technologies. Research programs to identify new disease targets and product candidates require
substantial technical, financial and human resources whether or not we ultimately identify any
candidates. Our research programs may initially show promise in identifying potential product
candidates, yet fail to yield product candidates for clinical development for a number of reasons,
including:  
    the research methodology used may not be successful in identifying potential product
candidates; or
    potential product candidates may on further study be shown to have harmful side
effects or other characteristics that indicate they are unlikely to be effective drugs. We may be unable to license or acquire suitable product candidates or products from third parties
for a number of reasons. In particular, the licensing and acquisition of pharmaceutical products is
a competitive area. A number of more established companies are also pursuing strategies to license
or acquire products in the ophthalmic and other fields. These established companies may have a
competitive advantage over us due to their size, cash resources and greater clinical development
and commercial capabilities. Other factors that may prevent us from licensing or otherwise
acquiring suitable product candidates include the following:  
    we may be unable to license or acquire the relevant technology on terms that would
allow us to make an appropriate return from the product;
    companies that perceive us to be their competitors may be unwilling to assign or
license their product rights to us; or
    we may be unable to identify suitable products or product candidates within our
areas of expertise. If we are unable to develop suitable potential product candidates through internal research
programs or by obtaining rights to novel therapeutics from third parties, our business will suffer. We expect to depend on collaborations with third parties to develop and commercialize our products. Our business strategy includes entering into collaborations with corporate and academic
collaborators for the research, development and commercialization of additional product candidates,
such as our collaborations with Pfizer and Archemix. These arrangements may not be scientifically
or commercially successful. The termination of any of these arrangements might adversely affect our
ability to develop, commercialize and market our products. The success of our collaboration arrangements will depend heavily on the efforts and activities of
our collaborators. Our collaborators will have significant discretion in determining the efforts
and resources that they will apply to these collaborations. The risks that we face in connection
with these collaborations, including our collaboration with Pfizer, include the following:  
    our collaboration agreements are, or are expected to be, for fixed terms and subject
to termination under various circumstances, including, in many cases, on short notice
without cause;
    we expect to be required in our collaboration agreements not to conduct specified
types of research and development in the field that is the subject of the
collaboration. These agreements may have the effect of limiting the areas of research
and development that we may pursue, either alone or in cooperation with third parties; 28




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
    our collaborators may develop and commercialize, either alone or with others,
products and services that are similar to or competitive with our products that are the
subject of the collaboration with us; and
    our collaborators may change the focus of their development and commercialization
efforts. Pharmaceutical and biotechnology companies historically have re-evaluated
their priorities following mergers and consolidations, which have been common in recent
years in these industries. The ability of our products to reach their potential could
be limited if our collaborators decrease or fail to increase spending relating to such
products. Collaborations with pharmaceutical companies and other third parties often are terminated or
allowed to expire by the other party. Such terminations or expirations can adversely affect us
financially as well as harm our business reputation. We may not be successful in establishing additional collaborations, which could adversely affect
our ability to develop and commercialize products and services. An important element of our business strategy is entering into collaborations for the development
and commercialization of products when we believe that doing so will maximize product value. If we
are unable to reach agreements with suitable collaborators, we may fail to meet our business
objectives for the affected product or program. We face significant competition in seeking
appropriate collaborators. Moreover, these collaboration arrangements are complex to negotiate and
time consuming to document. We may not be successful in our efforts to establish additional
collaborations or other alternative arrangements. The terms of any additional collaborations or
other arrangements that we establish may not be favorable to us. Moreover, these collaborations or
other arrangements may not be successful. We currently have no operational manufacturing facilities for Macugen and a limited number of
manufacturing personnel. We depend on third parties to manufacture Macugen. If these manufacturers
fail to meet our requirements, our product development and commercialization efforts may be
materially harmed. We have a limited number of personnel with experience in commercial manufacturing, and we do not
own or lease any facilities that currently manufacture Macugen or any component of Macugen. In
November 2004, we acquired a manufacturing facility in Boulder, Colorado that we plan to develop to
use as a second source of supply for the active pharmaceutical ingredient of Macugen, but that
facility is not currently operational for such purpose. Accordingly, unless or until we develop or
acquire manufacturing capabilities, we will depend on third parties to manufacture Macugen and any
future products that we may develop. We rely on separate single sources for the active pharmaceutical ingredient used in Macugen, the
fill and finish for the finished drug product and the PEGylation reagent. While such suppliers and
services providers provided similar products and services for our clinical trials and are providing
services for our current commercial supply of Macugen, there is no assurance that these
manufacturers will continue to meet our requirements. Other sources for these products and
services could be available to us, but may be available on terms less favorable to us and may delay
our manufacturing activities. We believe we will have sufficient capacity to supply the active pharmaceutical ingredient and to
manufacture Macugen to meet anticipated demand through the first quarter of 2007. In order to
sustain Macugen supply at the quantities we believe will be necessary to meet anticipated future
market demand, we and our contract manufacturer will need to increase the manufacturing capacity
for the active pharmaceutical ingredient of Macugen. We initially intend to increase manufacturing
capacity for the active pharmaceutical ingredient of Macugen at our contract manufacturing
facility. We also intend to 29




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invest in appropriate infrastructure at our Boulder manufacturing facility to prepare the facility
to become a second source for commercial scale production of the active pharmaceutical ingredient
of Macugen. We will also continue to explore other alternatives for increasing manufacturing capacity. We are
currently working to increase the capacity for finished product manufacturing and to improve the
related packaging operation. If we are unable to increase our manufacturing capacity or are
delayed in doing so, we may not be able to produce Macugen in a sufficient quantity to meet future
requirements to sustain supply of the product to meet anticipated future demand. In addition, the
cost of increasing manufacturing capacity may be expensive. Our revenues and gross margins could
be adversely affected by any inability to meet demand and the increased cost in increasing
manufacturing capacity. Reliance on third party manufacturers entails risks to which we would not be subject if we
manufactured products ourselves, including:  
    reliance on the third party for regulatory compliance and quality assurance;
    the possible breach of the manufacturing agreement by the third party because of
factors beyond our control; and
    the possibility of termination or non-renewal of the agreement by the third party,
based on its own business priorities, at a time that is costly or inconvenient for us. The manufacture and packaging of pharmaceutical products such as Macugen are subject to the
requirements of the FDA and similar foreign regulatory bodies. If we or our third party
manufacturers fail to satisfy these requirements, our product development and commercialization
efforts may be materially harmed. The manufacture and packaging of pharmaceutical products, such as Macugen and our future product
candidates, are regulated by the FDA and similar foreign regulatory bodies and must be conducted in
accordance with the FDAs current good manufacturing practices and comparable requirements of
foreign regulatory bodies. There are a limited number of manufacturers that operate under these
current good manufacturing practices regulations who are both capable of manufacturing Macugen and
willing to do so. Failure by us (including in connection with the development of our Boulder
manufacturing facility) or our third party manufacturers to comply with applicable regulations,
requirements, or guidelines could result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our
products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of
product, operating restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business. For example, as part of our application filed by Pfizer for the use
of Macugen in the treatment of neovascular AMD in Europe, the facilities used at each stage of the
manufacturing process for Macugen may go through a pre-approval inspection like that which was
required by the FDA. Changes in the manufacturing process or procedure, including a change in the location where the
product is manufactured or a change of a third party manufacturer, require prior FDA review and/or
approval of the manufacturing process and procedures in accordance with the FDAs current good
manufacturing practices. There are comparable foreign requirements. This review may be costly and
time consuming and could delay or prevent the launch of a product or the use of a facility to
manufacture a product. For example, if after the development of our Boulder manufacturing facility,
we move the manufacturing of the active pharmaceutical ingredient for Macugen to our facility in
Boulder and we cannot establish, to the satisfaction of the FDA, that the products manufactured at
the new site are comparable to those manufactured at the initial site, we may not obtain or may be
delayed in obtaining approval to manufacture the active pharmaceutical ingredient in Boulder. In
addition, if we elect to manufacture products at the facility of another third party, we would need
to ensure that the new facility and the 30




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manufacturing process are in substantial compliance with current good manufacturing practices. Any
such change in facility would be subject to a pre-approval inspection by the FDA and would again
require us to demonstration product comparability to the FDA. Foreign regulatory agencies have
similar requirements. The FDA and similar foreign regulatory bodies may also implement new standards, or change their
interpretation and enforcement of existing standards and requirements, for manufacture, packaging
or testing of products at any time. If we are unable to comply, we may be subject to regulatory,
civil actions or penalties which could significantly and adversely affect our business. For
example, as a result of a post-approval commitment to the FDA to improve the control and
environment for our finished drug product, we may need to change the final presentation or
packaging for Macugen. Such a change may lead to an increase in cost of goods. Macugen and our other potential products may not be commercially viable if we fail to obtain an
adequate level of reimbursement for these products by Medicare and other third party payors. The
markets for our products may also be limited by the indications for which their use may be
reimbursed or the frequency in which they may be administered. The availability and levels of reimbursement by governmental and other third party payors affect
the market for products such as Macugen and others that we may develop. These third party payors
continually attempt to contain or reduce the costs of healthcare by challenging the prices charged
for medical products and services. In some foreign countries, particularly Canada and the countries
of the European Union, the pricing of prescription pharmaceuticals is subject to governmental
control. In these countries, pricing negotiations with governmental authorities can take six to
twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial
that compares the cost-effectiveness of our products, including Macugen, to other available
therapies. If reimbursement for our products is unavailable or limited in scope or amount or if
pricing is set at unsatisfactory levels, our business could be materially harmed. Because most persons suffering from neovascular AMD are elderly, we expect that coverage for
Macugen in the United States will be primarily through the Medicare program. Although drugs that
are not usually self-administered are ordinarily covered by Medicare, the Medicare program has
taken the position that it can decide not to cover particular drugs if it determines that they are
not reasonable and necessary for Medicare beneficiaries. Limitations on coverage could also be
imposed at the local Medicare carrier level or by fiscal intermediaries. In February 2005, CMS
determined that, effective January 1, 2005, Macugens Medicare reimbursement will be average sales
price plus six percent. By February 28, 2005, Medicare carriers of all 50 states confirmed Macugen
reimbursement, according to the FDA label, without restrictions. However, our business could be
materially adversely affected if the Medicare program, local Medicare carriers or fiscal
intermediaries were to subsequently make such a determination and deny or limit the reimbursement
of Macugen. Our business also could be adversely affected if physicians are not reimbursed by
Medicare for the cost of the procedure in which they administer Macugen on a basis satisfactory to
the administering physicians. Also, if the local contractors that administer the Medicare program
are slow to reimburse physicians for Macugen, the demand for Macugen may decrease and our business
could be adversely affected. We also will need to obtain approvals for reimbursement of Macugen from private insurers, including
managed care organizations. We expect that private insurers will consider the efficacy,
cost-effectiveness and safety of Macugen in determining whether and at what level to approve
reimbursement for Macugen therapy. Obtaining these approvals can be a time consuming and expensive
process. Our business would 31




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be materially adversely affected if we do not receive approval for reimbursement of Macugen from
private insurers on a satisfactory basis. Our business could also be adversely affected if the Medicare program or other reimbursing bodies
or payors limit the indications for which Macugen will be reimbursed to a smaller set than we
believe it is effective in treating or establish a limitation on the frequency with which Macugen
may be administered that is less often than we believe would be effective. We expect to experience pricing pressures in connection with the sale of Macugen and our future
products due to the trend toward programs aimed at reducing healthcare costs, the increasing
influence of health maintenance organizations and additional legislative proposals. The 2003 Medicare prescription drug coverage legislation, The Medicare Prescription Drug
Improvement and Modernization Act, or the MMA, and future legislative or regulatory reform of the
healthcare system may affect our ability to sell our products profitably. In both the United States and some non-U.S. jurisdictions, there have been a number of legislative
and regulatory proposals to change the healthcare system in ways that could affect our ability to
sell our products profitably. In the United States, new legislation may be proposed at the federal
and state levels that would result in significant changes to the healthcare system, either
nationally or at the state level. Effective January 2004, Medicare prescription drug coverage
legislation, the MMA., changed the methodology used to calculate reimbursement for drugs such as
Macugen that are administered in physicians offices in a manner intended to reduce the amount that
is subject to reimbursement. In addition, beginning in January 2006, the legislation directs the
Secretary of the Department of Health and Human Services, or HHS, to contract with procurement
organizations to purchase physician-administered drugs from the manufacturers and provides
physicians with the option to obtain drugs through these organizations as an alternative to
purchasing from the manufacturers, which some physicians may find advantageous. These changes may
also cause private insurers to reduce the amounts that they will pay for physician-administered
drugs. In addition, CMS, the agency within HHS that administers Medicare and is responsible for
reimbursement of the cost of Macugen, has asserted the authority of Medicare not to cover
particular drugs if it determines that they are not reasonable and necessary for Medicare
beneficiaries or to cover them at a lesser rate, comparable to that for drugs already reimbursed
that CMS considers to be therapeutically comparable. Further federal and state proposals and
healthcare reforms are likely. Our results of operations could be materially adversely affected by
the Medicare prescription drug coverage legislation, by the possible effect of this legislation on
amounts that private insurers will pay and by other healthcare reforms that may be enacted or
adopted in the future. We face the risk of product liability claims and may not have adequate insurance coverage. Our business exposes us to the risk of product liability claims that is inherent in the
manufacturing, testing and marketing of drugs and related products. Claims that one or more of our
products harms people, regardless of the merits, could be costly, divert our managements attention
and adversely affect our reputation and demand for our products. We currently have product liability insurance that covers liability arising from our clinical
trials and product sold up to a $20 million annual aggregate limit. Insurance coverage is
increasingly expensive. We may not have and we may not be able to maintain adequate protection
against potential liabilities. If we are unable to maintain insurance at acceptable cost or
otherwise protect against potential product liability claims, we will be exposed to significant
liabilities, which may materially and adversely affect our business and financial position. These
liabilities could prevent or interfere with our product development and commercialization efforts. 32




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We depend on our key personnel. If we are not able to retain them or recruit additional technical
personnel, our business will suffer. We are highly dependent on the principal members of our management and scientific staff,
particularly Dr. David R. Guyer, our co-founder and Chief Executive Officer, and Dr. Anthony P.
Adamis, our scientific pioneer, Chief Scientific Officer and Executive Vice President, Research and
Development. Our employment agreements with these and our other executive officers are terminable
on short or no notice. We do not carry key man life insurance on any of our key personnel. The loss
of service of any of our key employees could harm our business. In addition, our growth will require us to hire a significant number of qualified technical,
commercial and administrative personnel. There is intense competition from other companies and
research and academic institutions for qualified personnel in the areas of our activities. If we
cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for
the continued development of our business, we may not be able to sustain our operations or grow. We are growing rapidly, and if we fail to adequately manage that growth, our business could be
adversely impacted. Our aggressive growth plan has included substantial and increasing investments in research and
development, sales and marketing, and facilities. We plan to continue to grow, and our plan has a
number of risks, some of which we cannot control. For example:  
    we have a single source of product revenue, a fixed amount of cash and predetermined
anticipated milestone payments that may be due to us, so we will need to generate
significant and continued product or other revenues to cover our anticipated growing
level of operating expenses;
    we will need to continue to assimilate a large number of new employees in different
functions throughout the company;
    we will need to manage complexities associated with a larger and faster growing
organization; and
    we will need to accurately anticipate demand for our products and maintain adequate
manufacturing capacity, and our ability to do so may depend on factors that we do not
control. Of course, there may be other risks unknown to us and we cannot guarantee that we will be able to
successfully manage these or other risks. We depend on third parties in the conduct of our clinical trials for Macugen and any failure of
those parties to fulfill their obligations could adversely affect our development and
commercialization plans. We depend on independent clinical investigators, contract research organizations and other third
party service providers in the conduct of our ongoing clinical trials for Macugen and expect to do
so with respect to other product candidates. We rely heavily on these parties for successful
execution of our clinical trials, but do not control many aspects of their activities. For example,
the clinical investigators are not our employees. However, we are responsible for ensuring that
each of our clinical trials is conducted in accordance with the general investigational plan,
protocols and regulatory standards for good clinical practice for the trial. Third parties may not
complete activities on schedule, or may not conduct our clinical trials in accordance with
regulatory requirements or our stated protocols. The failure of these third parties to carry out
their obligations could delay or prevent the development and commercialization of additional
indications for Macugen and future product candidates. 33




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Regulatory Risks If our clinical trials generate data that are not as favorable as historical data, our clinical
trials are viewed as unsuccessful, or if we experience significant delays in these trials, our
ability to further commercialize Macugen and our future product candidates will be impaired. We must provide the FDA and similar foreign regulatory authorities with preclinical and clinical
data that demonstrate that our product candidates are safe and effective for each target indication
before they can be approved for commercial distribution. The preclinical testing and clinical
trials of any product candidates that we develop must comply with regulations by numerous federal,
state and local government authorities in the United States, principally the FDA, and by similar
agencies in other countries. Clinical development is a long, expensive and uncertain process and is
subject to delays. We may encounter delays or rejections based on our inability to enroll or keep
enrolled enough patients to complete our clinical trials, especially as new competitors are
approved to enter into the market. Patient enrollment depends on many factors, including the size
of the patient population, the nature of the trial protocol, the proximity of patients to clinical
sites and the eligibility criteria for the study. Although we have not to date experienced any significant delays in enrolling clinical trial
patients for our ongoing clinical trials, delays in patient enrollment for future trials may result
in increased costs and delays, which could have a harmful effect on our ability to develop
products. For example, we are enrolling patients in a Phase 2 clinical trial for the use of
Macugen in the treatment of RVO and a Phase 4 combination trial with Macugen and Visudyne versus
Macugen alone. We may also commence additional clinical trials. It may take several years to complete the testing of a product, and failure can occur at any stage
of testing. For example:  
    interim results of preclinical or clinical studies are not necessarily predictive of
their final results, and acceptable results in early studies might not be seen in later
studies, in large part because earlier phases of studies are often conducted on smaller
groups of patients than later studies, and without the same trial design features, such
as randomized controls and long-term patient follow-up and analysis;
    potential products that appear promising at early stages of development may
ultimately fail for a number of reasons, including the possibility that the products
may be ineffective, less effective than products of our competitors or cause harmful
side effects;
    any preclinical or clinical test may fail to produce results satisfactory to the FDA
or foreign regulatory authorities;
    preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval;
    negative or inconclusive results from a preclinical study or clinical trial or
adverse medical events during a clinical trial could cause a preclinical study or
clinical trial to be repeated or a program to be terminated, even if other studies or
trials relating to the program are successful;
    the FDA can place a hold on a clinical trial if, among other reasons, it finds that
patients enrolled in the trial are or would be exposed to an unreasonable and
significant risk of illness or injury;
    we may encounter delays or rejections based on changes in regulatory agency policies
during the period in which we develop a drug or the period required for review of any
application for regulatory agency approval;
    our clinical trials may not demonstrate the safety and efficacy needed for our
products to receive regulatory approval; and 34




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
    our FDA-required post-marketing safety trials may identify new, more frequent, or
more serious adverse events than those previously characterized, which may limit
product acceptance. In addition, as part of the drug approval process, we must conduct a comprehensive assessment of
the carcinogenic, or cancer causing, potential of our product candidates. Our testing of Macugen to
date indicates that the products carcinogenic potential is low. As part of our approval process
with the FDA for the use of Macugen in the treatment of neovascular AMD, we were not required to
conduct further carcinogenicity testing of Macugen. We do not currently anticipate that we will
be required to conduct additional carcinogenicity testing of Macugen prior to any approval of
Macugens use in the treatment of DME. If we are required to conduct additional clinical trials or other studies of Macugen for use in the
treatment of DME or RVO beyond those that we currently contemplate, if we are unable to
successfully complete our clinical trials or other studies or if the results of these trials or
studies are not positive or are only modestly positive, we may be delayed in obtaining marketing
approval for Macugen for such indications, we may not be able to obtain marketing approval for such
indications or we may obtain approval that is not as broad as intended. Our product development
costs will also increase if we experience delays in testing or approvals. Significant clinical
trial delays could allow our competitors to bring products to market before we do and impair our
ability to commercialize our products or potential products. If any of this occurs, our business
will be materially harmed. Furthermore, our future products may not be effective, may be only moderately effective or may
prove to have undesirable or unintended side effects, toxicities or other characteristics that may
preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a
material adverse effect on our business. The FDA and other regulatory authorities may not approve
any future product that we may develop. The FDA may not approve Macugen for any additional
indications. The fast track designation for development of Macugen in DME may not actually lead to a faster
development or regulatory review or approval process. If a drug is intended for the treatment of a serious or life-threatening condition and the drug
demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may
apply for FDA fast track designation. The fast track classification does not apply to the product
alone, but applies to the combination of the product and the specific indication or indications for
which it is being studied. The FDAs fast track programs are designed to facilitate the clinical
development and evaluation of the drugs safety and efficacy for the fast track indication or
indications. Marketing applications filed by sponsors of products in fast track development may
qualify for expedited review under policies or procedures offered by the FDA, but the fast track
designation does not assure such qualification. We obtained, and received marketing approval from the FDA after, a fast track designation from the
FDA for Macugen in the treatment of neovascular AMD. We also have a fast track designation from
the FDA for Macugen in the treatment of DME. However, our fast track designation with respect to
DME may be withdrawn by the FDA if it believes that the designation is no longer supported by data
from our clinical development program. Further, we may not experience a faster development process,
review or approval with respect to any application we may file with respect to the use of Macugen
in the treatment of DME compared to conventional FDA procedures. 35




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We may not be able to obtain marketing approval for any other product resulting from our
development efforts. Failure to obtain additional approvals could materially harm our business. Although we were not required to conduct additional research and development prior to the approval
of Macugen in the United States for the treatment of neovascular AMD, the use of Macugen for the
treatment of other indications and other products that we are developing or may develop in the
future will require additional research and development and regulatory approval prior to commercial
launch. The research and development work that we must perform will include extensive preclinical
studies and clinical trials. We will be required to obtain an investigational new drug application,
or IND, prior to initiating human clinical trials in the United States and must obtain regulatory
approval prior to any commercial distribution. This process is expensive, uncertain and lengthy,
often taking a number of years until a product is approved for commercial distribution. While we
have received regulatory approval to market Macugen in the United States for use in the treatment
of neovascular AMD, failure to obtain required regulatory approvals for other uses of Macugen or
for other products could materially harm our business. We may need to successfully address a number of technological challenges in order to complete the
development of Macugen for other indications or any of our future products, such as manufacturing
process validation and product specification testing. In addition, administration of a drug via intravitreal injection is a new method for the
potentially long-term treatment of chronic eye disease. As a result, as we experienced with the FDA
prior to the approval of Macugen in the United States, regulatory agencies may apply new standards
for safety, manufacturing, packaging and distribution of drugs using this mode of administration.
It may be time consuming or expensive for us to comply with these standards. Non-U.S. regulatory
authorities may also apply new standards, which may preclude Macugen from being approved in other
jurisdictions. This could also increase our commercialization costs, possibly materially. Furthermore, our future products may not be effective, may be only moderately effective or may
prove to have undesirable or unintended side effects, toxicities or other characteristics that may
preclude our obtaining regulatory approval or prevent or limit commercial use, which could have a
material adverse effect on our business. The FDA and other regulatory authorities may not approve
any product that we develop. Macugen and any future products could be subject to restrictions or withdrawal from the market and
we may be subject to penalties if we fail to comply with regulatory requirements, or if we
experience unanticipated problems with our products after approval. Macugen, or any other product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data, advertising and promotional activities for such product,
will be subject to continual requirements, review and periodic inspections by the FDA and other
regulatory bodies. Even if regulatory approval of a product is granted, such as the FDAs approval
of Macugen in December 2004 for the treatment of neovascular AMD, the approval may be subject to
limitations on the indicated uses for which the product may be marketed or to the conditions of
approval, or contain requirements for costly post-marketing testing and surveillance to monitor the
safety or efficacy of the product. For example, as part of the FDAs approval of Macugen for use in
the treatment of neovascular AMD, the FDA asked us to:  
    provide subsequent information on the potential degenerative effects on the
neurosensory retina based on a study of at least two years and adverse effects on the
corneal endothelium based on a study of at least one year; 36




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
    provide safety and efficacy data from a clinical study of at least two years of at
least two additional doses of Macugen below the approved dose of 0.3 mg for neovascular
AMD; and
    strengthen controls relative to the Macugen packaging components and operations. Furthermore, new information may arise from our ongoing or new clinical trials or continuing
analysis of the data from our clinical trials that may be viewed as less favorable than previous
data. Later discovery of previously unknown problems with our products, manufacturer or manufacturing
processes, or failure to comply with regulatory requirements, such as the post-approval commitments
outlined above, may result in:  
    restrictions on such products or manufacturing processes;
    withdrawal of the products from the market;
    voluntary or mandatory recall;
    fines;
    suspension of regulatory approvals;
    requests from the FDA or other agencies for additional information from us or data
from additional clinical trials;
    product seizure; and
    injunctions or the imposition of civil or criminal penalties. We may be slow to adapt, or we may never adapt, to changes in existing regulatory requirements or
adoption of new regulatory requirements or policies. Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our
products abroad. We intend to have our products marketed outside the United States. In order to market our products
in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory
approvals and comply with numerous and varying regulatory requirements. In the case of Macugen,
Pfizer has responsibility to obtain regulatory approvals outside the United States, and we depend
on Pfizer to obtain these approvals. Pfizer has filed new drug applications for Macugen with the
European Medicines Evaluation Agency, which covers 25 countries, and with an additional nine
countries. The approval procedure varies among countries and can involve additional testing. The
time required to obtain approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process may include all of the risks associated with obtaining FDA approval. We
may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries, and approval by one foreign
regulatory authority does not ensure approval by regulatory authorities in other foreign countries
or by the FDA. We and our collaborators may not be able to file for regulatory approvals and may
not receive necessary approvals to commercialize our products in any market. The failure to obtain
these approvals could materially adversely affect our business, financial condition and results of
operations. Risks Relating to Intellectual Property If we are unable to obtain and maintain protection for the intellectual property incorporated into
our products, the value of our technology and products will be adversely affected. Our success will depend in large part on our ability or the ability of our licensors to obtain and
maintain protection in the United States and other countries for the intellectual property
incorporated into our products. The patent situation in the field of biotechnology and
pharmaceuticals generally is highly 37




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uncertain and involves complex legal and scientific questions. Neither we nor our licensors may be
able to obtain additional issued patents relating to our technology. Even if issued, patents may be
challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop
competitors from marketing similar products or limit the length of term of patent protection we may
have for our products. In addition, our patents and our licensors patents also may not afford us
protection against competitors with similar technology. Because patent applications in the United
States and many foreign jurisdictions are typically not published until 18 months after filing, or
in some cases not at all, and because publications of discoveries in the scientific literature
often lag behind actual discoveries, neither we nor our licensors can be certain that we or they
were the first to make the inventions claimed in issued patents or pending patent applications, or
that we or they were the first to file for protection of the inventions set forth in these patent
applications. If we fail to comply with our obligations in the agreements under which we license development or
commercialization rights to products or technology from third parties, we could lose license rights
that are important to our business. We are a party to a number of technology licenses that are important to our business and expect to
enter into additional licenses in the future. For example, we hold licenses from Gilead Sciences,
Nektar Therapeutics and Isis Pharmaceuticals under patents relating to Macugen. These licenses
impose various commercialization, milestone payment, royalty, insurance and other obligations on
us. If we fail to comply with these obligations, the licensor may have the right to terminate the
license, in which event we would not be able to market products, such as Macugen, that may be
covered by the license. If we are unable to protect the confidentiality of our proprietary information and know-how, the
value of our technology and products could be adversely affected. In addition to patented technology, we rely upon unpatented proprietary technology, processes, and
know-how. We seek to protect this information in part by confidentiality agreements with our
employees, consultants and third parties. These agreements may be breached, and we may not have
adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or
be independently developed by competitors. Third parties may own or control patents or patent applications that could be determined to be
infringed by our technologies, drug targets or potential products. This could cause us to become
involved in expensive patent litigation or other proceedings, which could result in our incurring
substantial costs and expenses and liability for damages. This could also require us to seek
licenses, which could increase our development and commercialization costs. In either case, this
could require us to stop some of our development and commercialization efforts. We may not have rights under some patents or patent applications that could be determined to be
infringed by technologies that we use in our research, drug targets that we select or product
candidates that we seek to develop and commercialize. Third parties may own or control these
patents and patent applications in the United States and abroad. These third parties could bring
claims against us or our collaborators that would cause us to incur substantial expenses and, if
successful against us, could cause us to pay substantial damages. Further, if a patent infringement
suit were brought against us or our collaborators, we or they could be forced to stop or delay
research, development, manufacturing or sales of the product or product candidate that is the
subject of the suit. As a result of patent infringement claims, or in order to avoid potential claims, we or our
collaborators may choose to seek, or be required to seek, a license from the third party and would
most likely be required to pay license fees or royalties or both. These licenses may not be
available on acceptable terms, 38




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or at all. Even if we or our collaborators were able to obtain a license, the rights may be
nonexclusive, which would give our competitors access to the same intellectual property.
Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect
of our business operations if, as a result of actual or threatened patent infringement claims, we
or our collaborators are unable to enter into licenses on acceptable terms. This could harm our
business significantly. There has been substantial litigation and other proceedings regarding the patent and other
intellectual property rights in the pharmaceutical and biotechnology industries. In addition to the
possibility of infringement claims against us, we may become a party to other patent litigation and
other proceedings, including interference proceedings declared by the United States Patent and
Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual
property rights with respect to our products and technology. The cost to us of any patent
litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our
competitors may be able to sustain the costs of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings could have a
material adverse effect on our ability to compete in the marketplace. Patent litigation and other
proceedings may also absorb significant management time. Risks Relating to Our Financial Results and Need for Financing We have a limited operating history and have incurred losses since inception. If we do not generate
significant revenues, we will not be able to achieve profitability. Sales of Macugen in the United States are currently our only source of product revenue. We have a
limited operating history and began selling Macugen in the United States in January 2005. To date,
we have focused primarily on the development of Macugen, preparation for its commercialization, and
its commercial launch. We began operations in 2000, and we have not been profitable in any quarter
since inception. As of March 31, 2005, we had an accumulated deficit of approximately $254.2
million. We expect to increase our spending significantly as we continue to expand our
infrastructure, development programs and commercialization activities. As a result, we will need to
generate significant revenues to pay these costs and achieve profitability. We do not know whether
or when we will become profitable because of the significant uncertainties with respect to our
ability to generate revenues from the sale of our products and from our existing and potential
future collaborations. Our revenues and operating results may fluctuate, and this fluctuation could cause financial
results to be below expectations. Our operating results may fluctuate from period to period for a number of reasons. Even if we
assume that revenues will continue to grow, some of our operating expenses are fixed in the short
term. Because of this, even a relatively small revenue shortfall may cause a periods results to be
below our expectations or projections. A revenue shortfall could arise from any number of factors,
some of which we cannot control. For example, we may face:  
    lower than expected demand for our products;
    inability to provide adequate supply of our products;
    changes in the governments or private payors reimbursement policies for our products;
    changes in wholesaler buying patterns; 39




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
    increased competition from new or existing products;
    delays in approvals for new products;
    fluctuations in foreign currency exchange rates; and
    changes in our product pricing strategies. Of these, we would only have control over changes in our product pricing strategies and, of
course, there may be other factors that affect our revenues in any given period. We may need additional financing, which may be difficult to obtain. Our failure to obtain necessary
financing or obtaining financing on unattractive terms could adversely affect our development
programs and other operations. We will require substantial funds to conduct development, including preclinical testing and
clinical trials, of our potential products. We will also require substantial funds to meet our
obligations to our licensors and maximize the prospective benefits to us from our licensors, and
manufacture and market products that are approved for commercial sale in the future, including
Macugen. We currently believe that our available cash, cash equivalents and marketable securities, expected
milestone payments and reimbursements from Pfizer under our collaboration and interest income will
be sufficient to fund our anticipated levels of operations for at least 12 months. However, our
future capital requirements will depend on many factors, including:  
    the success of our collaboration with Pfizer to commercialize and further develop
Macugen;
    the scope and results of our clinical trials;
    the cost of manufacturing activities including the expansion of our Boulder facility;
    the cost of commercialization activities, including product marketing, sales and
distribution;
    advancement of other product candidates into development;
    potential acquisition or in-licensing of other products or technologies;
    the timing of, extent of, and the costs involved in, obtaining regulatory approvals;
    the cost of manufacturing activities;
    the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other patent-related costs, including litigation costs and the
results of such litigation; and
    our ability to establish and maintain additional collaborative arrangements. Additional financing may not be available to us when we need it or it may not be available on
favorable terms. If we are unable to obtain adequate financing on a timely basis, we may be
required to significantly curtail one or more of our development, licensing or acquisition
programs. We could be required to seek 40




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funds through arrangements with collaborators or others that may require us to relinquish rights to
some of our technologies, product candidates or products that we would otherwise pursue on our own.
If we raise additional funds by issuing equity securities, our then-existing stockholders will
experience dilution and the terms of any new equity securities may have preferences over our common
stock. General Company Related Risks Our executive officers, directors and major stockholders will maintain the ability to control all
matters submitted to stockholders for approval. Our executive officers, directors and stockholders who own more than 5% of our outstanding common
stock, in the aggregate, beneficially owned shares representing approximately 39% of our capital
stock as of March 1, 2005. As a result, if these stockholders were to choose to act together, they
would be able to substantially influence all matters submitted to our stockholders for approval, as
well as our management and affairs. For example, these persons, if they choose to act together,
would substantially influence the election of directors and approval of any merger, consolidation
or sale of all or substantially all of our assets. This concentration of voting power could delay
or prevent an acquisition of our company on terms that other stockholders may desire. Provisions in our charter documents and under Delaware law may prevent or frustrate attempts by our
stockholders to change our management and hinder efforts to acquire a controlling interest in us. Provisions of our corporate charter and bylaws may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may consider favorable, including
transactions in which you might otherwise receive a premium for your shares. These provisions may
also prevent or frustrate attempts by our stockholders to replace or remove our management. These
provisions include:  
    a classified board of directors;
    limitations on the removal of directors;
    advance notice requirements for stockholder proposals and nominations;
    the inability of stockholders to act by written consent or to call special meetings; and
    the ability of our board of directors to designate the terms of and issue new series
of preferred stock without stockholder approval. The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote
is necessary to amend or repeal the above provisions of our certificate of incorporation. In
addition, absent approval of our board of directors, our bylaws may only be amended or repealed by
the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to
vote. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested stockholder, generally a
person which together with its affiliates owns or within the last three years has owned 15% of our
voting stock, for a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in a prescribed
manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our
company. Our stock price is volatile; purchasers of our common stock could incur substantial losses. Our stock price is volatile. From our initial public offering in January 2004 through May 10,
2005, the trading price of our common stock has ranged from $21.75 to $49.12 per share. The stock
market in general and the market for biotechnology companies in particular have experienced extreme
volatility that 41




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has often been unrelated to the operating performance of particular companies. As a result of this
volatility, investors may not be able to sell their common stock at or above their respective
purchase prices. The market price for our common stock may be influenced by many factors,
including:  
    failure of Macugen or any of our product candidates, if approved, to achieve
commercial success;
    results of our clinical trials or those of our competitors;
    the regulatory status of Macugen and our other potential products;
    the regulatory status of potentially competitive products;
    developments concerning our collaborators, including Pfizer;
    regulatory developments in, and outside of, the United States;
    developments or disputes concerning patents or other proprietary rights;
    our ability to manufacture products to commercial standards;
    public concern over our products;
    litigation;
    the departure of key personnel;
    future sales of our common stock;
    variations in our financial results or those of companies that are perceived to be
similar to us;
    changes in the structure of healthcare payment systems;
    investors perceptions of us; and
    general economic, industry and market conditions. If there are substantial sales of our common stock, our stock price could decline. If our existing stockholders sell a large number of shares of our common stock or the public market
perceives that existing stockholders might sell shares of common stock, the market price of our
common stock could decline significantly. All of the shares sold in our initial public offering in
January 2004 and secondary public offering in May 2004 are freely tradable without restriction or
further registration under the federal securities laws, unless purchased by our affiliates as
that term is defined in Rule 144 under the Securities Act. Substantially all other shares of our
common stock are saleable under Rule 144 under the Securities Act. Also, some stockholders
maintain rights with respect to the registration of the sale of their shares of common stock with
the Securities and Exchange Commission. We have registered approximately 9,543,000 shares of common stock that are authorized for issuance
under our stock plans. As of March 31, 2005, 5,270,250 shares were subject to outstanding options
and 242,042 outstanding restricted stock grants, 1,442,750 of which were vested. Of the outstanding options, options
for 2,586,994 shares were immediately exercisable, but we had the right to repurchase at the
initial exercise price all but 1,177,754 of the shares issuable upon exercise of these options.
Because they are registered, the shares authorized for issuance under our stock plans can be freely
sold in the public market upon issuance, subject to our repurchase rights and the restrictions
imposed on our affiliates under Rule 144. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We
invest in high-quality financial instruments, primarily money market funds, federal agency notes,
asset backed securities, corporate debt securities and United States treasury notes, with the
effective duration of the portfolio less than nine months and no security with an effective
duration in excess of two years, which we believe are subject to limited credit risk. We currently
do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not
believe that we have any material exposure to interest rate risk arising from our investments. 42




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Most of our transactions are conducted in United States dollars, although we do have some
development and commercialization agreements with vendors located outside the United States.
Transactions under certain of these agreements are conducted in United States dollars, subject to
adjustment based on significant fluctuations in currency exchange rates. Transactions under certain
other of these agreements are conducted in the local foreign currency. If the exchange rate
undergoes a change of 10%, we do not believe that it would have a material impact on our results of
operations or cash flows. 
 Item 4. Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure
that information required to be disclosed in our reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial officer
as appropriate, to allow timely decisions regarding required disclosure. As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this
report, we carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act. This evaluation was carried out under the supervision and with the participation of our
management, including our chief executive officer and our chief financial officer. Based on that
evaluation, these officers have concluded that, as of March 31, 2005, our disclosure controls and
procedures were effective to ensure that material information relating to us required to be
included in our reports filed under the Exchange Act would be made known to them by others. There have been no changes in our internal controls over financial reporting (as defined in Rules
13a-15(b) and 15(d)-15(f) under the Exchange Act) or in other factors that occurred during the
period covered by this report that has materially affected or is reasonably likely to materially
affect internal controls over financial reporting. 43




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Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings. We are currently not a party to any material legal proceedings. 
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds. In February 2005, we issued in a private placement 344,000 shares of our common stock to an
affiliate of Pfizer Inc. at a per share price of approximately $43.60 for total proceeds of
$15.0 million in connection with the approval by the FDA of Macugen for the treatment of
neovascular AMD. 
 Item 3. Defaults Upon Senior Securities. None 
 Item 4. Submission to a Vote of Security Holders. None 
 Item 5. Other Information. None 
 Item 6. Exhibits. Exhibit No.
    
    Description10.1
    
    Consulting Agreement, dated as of April 7, 2005, by and between the Registrant and Marty Glick31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer
 44




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned
thereunto duly authorized. EYETECH PHARMACEUTICALS, INC.(Registrant)Dated: May 16, 2005By:
    
    /s/ DAVID R. GUYERDavid R. Guyer, M.D.Chief Executive OfficerBy:
    
    /s/ CHRISTOPHER CARROLLChristopher CarrollChief Accounting Officer
 - 45 -




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EXHIBIT INDEX Exhibit No.
    
    Description10.1
    
    Consulting Agreement, dated as of April 7, 2005, by and between the Registrant and Marty Glick31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer32.1
    
    Rule 1350 Certification of Chief Executive Officer32.2
    
    Rule 1350 Certification of Chief Financial Officer